RetireMentors

Financial Planning

Social Security benefits guide can be confusing

Jeffrey B. Miller is Professor of Economics Emeritus at the University of
Delaware. He earned his doctorate from the University of Pennsylvania in 1976
and taught at the University of Delaware for 36 years. In
2009 he co-founded Social
Security Choices, a firm that specializes in providing customized
information to assist people in formulating their best strategies for claiming
Social Security benefits. Dr Miller worked at Social Security after graduating
from college.
JMiller@socialsecuritychoices.com

It takes only a few days of manning the email and telephone at my firm, SocialSecurityChoices.com, to realize that even conscientious and financially sophisticated individuals are often confused by the advice that the Social Security Administration (SSA) provides on when to claim retirement benefits.

To some callers, the advice seems contradictory. But let's take a second look.

“At Social Security, we're often asked, "What is the best age to start receiving retirement benefits?" The answer is that there is no one "best age" for everyone and, ultimately, it is your choice. You should make an informed decision about when to apply for benefits based...

“If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between.”

Reading these out of context, it appears that we are being told to be careful about a claiming decision that is of little consequence. What is actually happening is that the first statement concerns married, divorced, and widowed individuals. The second statement is about single workers.

While we imagine that there must be a grand strategy for all retirees, it is simply not true. The first rule in reading SSA publications is to make certain you understand if the comments are related to single individuals or to the other group of married, divorced and widowed individuals, since the strategies and issues differ.

Single persons

Social Security has carefully calculated the increase in yearly benefits so that a single person who lives a normal lifespan will receive approximately the same benefits regardless of when the single person claims.

It is important to understand, however, that this calculation is based on two underlying assumptions. First, as stated, the choice of claiming year does not matter if you live an average lifespan. If a single person is in poor health and does not expect to live a normal lifespan, then claiming early is a better option. If a person is in excellent health, they are likely to live longer than an average lifespan and should perhaps delay their claiming of benefits.

Secondly, benefits paid in the future are not as valuable as benefits paid today. So the calculation depends on what rate should be used to “discount” these future benefits. Social Security, in designing the benefit structure, uses a rate (3%) which is historically very reasonable. Today, however, interest rates are very low so the advantage of delayed claiming is higher today than it would be if interest rates were closer to historical levels.

In other words, a single person today is better off delaying their claiming decision than to claim early and put their money in the bank or Inflation-Protected (TIP) Bonds.

Married, divorced, or widowed Persons

What holds for a single person is not applicable for people who are married, divorced or widowed. For these groups careful analysis of their situation can make a huge difference in the benefits they can receive under Social Security. In another publication The Social Security Claiming Guide,written at the Boston College Center for Retirement Research and supported financially by the Social Security Administration, the following quote appears on the cover:

“A guide to the most important financial decision you'll likely make"

The Guide then goes on to explain why careful consideration of various claiming options can be so important. While the Guide does not provide a custom analysis for this complex decision, it does discuss a wide range of issues related to Social Security including some that I have discussed in my previous RetireMentor articles.

Since people who are not single have many more options, it’s important to understand how single is defined. Someone who has been married for 10 years and then divorced is not single for purposes of claiming Social Security. This is true whether the ex-spouse is still living or has passed away.

Once Social Security comes out with new regulations, individuals in same-sex marriages now counted as single will almost certainly fall into the non-single category as well. For these groups, it is important to realize that when you claim "may be the most important financial decision you will ever make."

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